Casotti Plumbers and Gas Fitters Pty Ltd v Montagu Stockbrokers Pty Ltd
[2009] WASC 151
•4 JUNE 2009
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: CASOTTI PLUMBERS & GAS FITTERS PTY LTD -v- MONTAGU STOCKBROKERS PTY LTD [2009] WASC 151
CORAM: MASTER SANDERSON
HEARD: 16 APRIL 2009
DELIVERED : 4 JUNE 2009
FILE NO/S: COR 199 of 2008
BETWEEN: CASOTTI PLUMBERS & GAS FITTERS PTY LTD (ACN 099 965 983)
Plaintiff
AND
MONTAGU STOCKBROKERS PTY LTD (ACN 099 368 432)
Defendant
Catchwords:
Corporations law - Application to set aside statutory demand - Turns on own facts
Legislation:
Nil
Result:
Application dismissed
Category: B
Representation:
Counsel:
Plaintiff: Mr N J Draper
Defendant: Mr D K J Skender
Solicitors:
Plaintiff: Granich Partners
Defendant: McKenzie Moncrieff Lawyers
Case(s) referred to in judgment(s):
Rosendorff v Totalisator Agency Board of Western Australia [2000] WASC 46
MASTER SANDERSON: This is the plaintiff's application to set aside a creditor statutory demand. A copy of the statutory demand appears as annexure A to the affidavit of Domenico Paul Casotti sworn 29 December 2008 and filed in support of the application. The amount in the statutory demand is $462,239.34. The make up of that alleged debt is particularised in the schedule to the demand. As there is an issue between the parties as to the way to the debt is described I will quote the schedule in full.
Description of the Debt
Amount of the debt
1.
Amount due and payable in respect of Account Number 51749 maintained pursuant to an agreement entered into on or about 21 February 2008 between the creditor and the company as trustee for the Casotti Superannuation Fund pursuant to which the creditor agreed to buy and sell shares on the company's behalf.
$3,714.05
2.
Amount due and payable in respect of Account Number 51750 maintained pursuant to an agreement entered into [sic] or about 21 February 2008 between the creditor and the company as trustee for the Casotti Superannuation Fund pursuant to which the creditor agreed to buy and sell options on the company's behalf.
$184,077.16
3.
Amount due and payable in respect of Account Number 51942 maintained pursuant to an agreement entered into [sic] or about 23 May 2008 between the creditor and the company pursuant to which the creditor agreed to buy and sell options on the company's behalf.
$274,448.13
TOTAL AMOUNT:
$462,239.34
The dispute between the parties which gives rise to this application is of remarkably narrow compass. In fact, there is no dispute on the facts at all. The following summary of the background to this application is taken mainly from the affidavit of Mr Casotti, which I have referred to above.
Early in February 2008 Mr Casotti met with Mr Tim Clark at the offices of the defendant. The purpose of the meeting was to discuss the possibility of the plaintiff opening accounts with the defendant to trade in shares, equities and options. Mr Clark was the representative of the defendant who was responsible for providing financial services to Mr Casotti on behalf of the plaintiff. The services provided involve dealing and advisory services in relation to financial products traded or to be traded. As a consequence of these discussions four accounts were opened in the plaintiff's name. On 22 February 2008 two of the accounts were opened. One was described as 'the Family account' and the other as 'the Superannuation account'. On 28 May 2008 the two further accounts were opened. One was described as 'the Leverage account' and the other as 'the Macquarie account'.
At the time of entering into these accounts, Mr Clark prepared what is described as a 'Statement of Advice'. A separate statement of advice was prepared for each account. In each of these statements of advice, Mr Casotti confirmed that he was classified 'as an Aggressive Investor'. He also confirmed that he was prepared to risk and possibly lose his investment capital. The aim of the investments was, of course, to make a significant return on the capital invested. The only caveat Mr Casotti offered to that general trading strategy was that with respect to the Superannuation account he wished to adopt a more conservative approach. He was not prepared to invest in Exchange Traded Options (ETO's) as he regarded this as too risky an investment and not suited for the purpose of a Superannuation account. It should be noted, however, that apart from this limitation on the trading with respect to the Superannuation account, it was always Mr Casotti's intention that he would, as the statement of advice stated, trade aggressively. He was not intending simply to buy shares on the stock exchange and sit on these shares. Indeed, it was not his intention just to trade in shares. He was intending to trade in derivatives - in this case, ETO's. Furthermore, when shares were purchased they were purchased under a margin lending regime. Without in any way wishing to be disparaging of such a trading strategy, it really amounts to an investor borrowing money in anticipation that the increase in the value of the shares will outpace the interest costs associated with the borrowing. If the strategy is successful the investor wins handsomely - he has 'leveraged' his investment. Of course, if the equities decline in value the investor is faced with not only the resulting capital loss but he must repay the loan and the costs associated therewith. In a bull market such investment strategies can yield spectacular returns. But if the market turns and the bear comes out of hibernation, stunning losses can result. Unfortunately, Mr Casotti was mauled by the bear.
Having set up these accounts Mr Casotti began trading. He says that the general manner of dealing with Mr Clark was for the two men to discuss potential trades. They would discuss strategies and the pros and cons of specific trades and Mr Clark would offer his opinion and recommendations. Based upon these discussions Mr Casotti would decide whether or not to proceed with a trade. Mr Clark would also recommend buys in companies that he had researched and which he believed were viable investments. Mr Clark notified Mr Casotti of future floats he believed may be of interest.
It is important at this point to note that there is no complaint by Mr Casotti that he was given misleading advice by Mr Clark, or anyone else working for the defendant. Mr Casotti accepts that he was and is a sophisticated investor who after discussions with Mr Clark made his own decisions. It is not suggested then that the statutory demand ought be set aside on the basis that the plaintiff has a claim against the defendant based on negligent advice leading to trading losses.
Mr Casotti's affidavit goes into some detail as to the way in which trading took place. In the end, as the plaintiff's case was framed, none of this is relevant. What is relevant is that by the end of May or early June 2008 the plaintiff's position with respect to its accounts had deteriorated. On 4 June 2008 Mr Clark sent Mr Casotti an email advising that the Family account had a margin call of $45,608.30. Mr Clark suggested certain strategies to overcome the deficit. Mr Casotti, on 6 June 2008, transferred $40,000 to the Family account. He did this, he says, primarily to reduce the margin balance in the Family account without having to adopt the strategies outlined by Mr Clark.
Regrettably, the position continued to deteriorate. By 29 June 2008 the Macquarie account had a shortfall of some $90,147.42. As a consequence, in the month of July the plaintiff paid $140,000 to the defendant to satisfy margin calls. Those payments were still not enough. By 31 July 2008 the Leverage account had a shortfall of $13,000. On 8 August 2008 the plaintiff made a payment of the sum of $38,000 to the Family account to cover this and other shortfalls.
Undaunted, Mr Casotti continued to trade. The result was that the plaintiff's losses continued to mount. Various strategies were discussed between Mr Clark and Mr Casotti but none of these strategies could stop the flow of losses. Although it is not made clear in Mr Casotti's affidavit, it was common ground between the parties that as the plaintiff's losses accumulated they were effectively funded by the defendant. Why this was so will be explained later in these reasons. But there is no doubt that Mr Casotti was aware that his trading losses were effectively being underwritten by the defendant.
From time to time Mr Clark spoke with Mr Casotti about the accumulated losses. He requested that funds be made available by the plaintiff to the defendant to cover these losses. For instance, on 8 October 2008 Mr Clark requested the plaintiff make payment of $200,000 as the defendant was no longer willing to cover that amount. A copy of that email is attached to Mr Casotti's affidavit and marked 'CC'. The affidavit makes it plain that Mr Casotti was not aware of the extent of the losses that he had sustained. He says that when he received Mr Clark's email of 8 October 2008 he was 'shocked and outraged'. But things were to get worse. On 11 October 2008 Mr Clark sent a further email saying that the amount owing was $495,683.79. Thereafter, Mr Casotti instructed the defendant to close out all of the plaintiff's positions. That was done and the amount specified in the statutory demand is what the defendant says it is owed by the plaintiff.
Reading Mr Casotti's affidavit, it is not entirely clear just what case is being put against the defendant. It might have been the thought that the plaintiff was alleging errors in the calculation of the amount owing. That is certainly hinted at in the affidavit. Alternatively, it may have been thought the claim was that the defendant had offered negligent advice. As I have indicated, that possible cause of action was specifically disavowed by counsel for the plaintiff. But again, it is hinted at in Mr Casotti's affidavit.
In fact, when it came to his oral submissions, counsel for the plaintiff submitted that the plaintiff had a cause of action based upon the fact that the defendant had allowed the plaintiff to run up debts by actually funding the plaintiff's trading. Counsel pointed to the fact that the agreement between the plaintiff and the defendant meant that in all of its trading activities the plaintiff had to provide the defendant with funds to settle the trades as and when required. It was never anticipated that the defendant would be providing credit to the plaintiff. In fact, that was what happened. From time to time the defendant did effectively provide credit to the plaintiff and, as the trading losses mounted, so the indebtedness of the plaintiff to the defendant increased to the plaintiff's disadvantage.
It is difficult to ascertain what cause of action the plaintiff might have in these circumstances such as to give rise to a genuine dispute which would warrant the statutory demand being set aside. It is difficult to see how any claim could arise in contract. The plaintiff authorised the trading and it was the plaintiff who was in breach of its contract with the defendant by not providing the funds necessary to meet any indebtedness. There is nothing in a contractual arrangement which anticipates that the defendant will decline to conduct the trading if it does not have sufficient funds.
If the claim is to be framed in tort then some duty must arise, breach of which has led to the losses sustained by the plaintiff. Counsel for the plaintiff was unable to point to any case where such a duty has been found to exist. Furthermore, there is no reason why such a duty should arise. Mr Casotti was a sophisticated investor dealing with complex financial instruments. He was not in a position of vulnerability and there is no reason to suppose that he was not aware that eventually he would have to meet any losses sustained as a consequence of his trading activities. So no cause of action in tort arises. During the course of his submissions, counsel submitted that there may have been a breach of fiduciary duty by the defendant. Even assuming that there was a fiduciary relationship between the plaintiff and the defendant it is difficult to see what duty has been breached. Fiduciary duties are prescriptive and there is nothing in the facts in this case that suggests any prescriptive duty has been breached.
There appears to be no legislative provision which would come to the aid of the plaintiff. By way of contrast, in Rosendorff v Totalisator Agency Board of Western Australia [2000] WASC 46 it was alleged that the plaintiff who placed bets on credit with the defendant could recover the money invested because the defendant accepted those bets in contravention of the Totalisator Agency Board Betting Tax Act 1960 (WA) (repealed) and associated regulations. But here, counsel could not point to any relevant legislation which prevented the defendant effectively extending credit to the plaintiff to engage in trading activities.
(In relation to the Rosendorff case, the decision to which I have referred related to an application for further and better particulars of a statement of claim. Neither that decision nor the subsequent appeal from that decision deals specifically with the question of whether or not, if bets placed with the defendant by the plaintiff allegedly on credit contravened the Act and the money invested could be recovered. I have referred to the case simply for the purposes of illustrating that such a plea, relying as it does on a statutory provision, might give rise to an arguable case. After all, in that case there was no challenge to the validity of the statement of claim.)
It is well understood, and is accepted by both parties in this case, that to establish that there is a 'genuine dispute' under s 459G of the Corporations Act 2001 (Cth), which would warrant the demand being set aside, the plaintiff must establish that there is a serious question to be tried. The test has been formulated in a number of different ways but this formulation, picking up as it does the well known criteria for the grant of an interlocutory injunction, is widely accepted. I am not satisfied that in this case there is a serious question to be tried. I am not satisfied that the plaintiff has a cause of action based upon the uncontested facts. It follows that the statutory demand cannot be set aside on the basis that there is a genuine dispute between the parties.
The plaintiff further complains that there is a defect in the demand which would warrant it being set aside. On behalf of the plaintiff it was said that the statutory demand in the schedule states the amounts claimed are due and payable pursuant to an agreement in terms of which the defendant agreed to buy and sell shares on the plaintiff's behalf. The plaintiff says that the liability is not a result of the plaintiff owing money to the defendant for shares the defendant purchased for the plaintiff as all those transactions were entered into for the defendant's benefit and on the defendant's behalf. To understand this submission, it is necessary to say something about the way in which business is conducted on the Australian Stock Exchange.
The position can be best summarised by the following quote from Austin R P, Ramsay I M, Ford's Principles of Corporations Law (13th ed, 2007):
Under the ASX Business Rules brokers are liable as principals between themselves on each contract, whether or not they are acting as agents: the buying broker must, at the subsequent settlement, pay the purchase price, whether or not it has been put in funds by the buyer; the selling broker must deliver securities, whether or not the seller has provided them. The buying broker, if acting as agent for a client, has a contract with that client under which the broker is entitled to indemnity for the purchase price. (1018 ‑ 1019)
The way in which this system works in practice is this. A client instructs his broker to buy shares. There is then a contract between the individual and the broker. The broker then purchases the shares. Although the broker is acting on behalf of the client, the broker is liable. Once a seller is found the seller's broker sells those shares. There is a contract between the seller's broker and the seller. But the seller's broker is liable for the delivery of those shares. This transaction is then consummated by the Stock Exchange Clearing House (ACH). The Clearing House having details of all the transactions of all brokers for a particular day, determines the net amounts payable by or to particular brokers. It is up to the broker then to break down the entitlement of each client consequent upon the trades conducted.
The complaint of the plaintiff is that the ascertainment of the amount claimed and how that amount arose is solely determined by ACH who notify the defendant of net amounts payable. It is said that the plaintiff is unable to ascertain what amount is being claimed or to ascertain how the amount claimed arose from the description of the debt contained in the demand.
In response to this submission, the plaintiff filed an affidavit of Katharine Raymond sworn 3 April 2009. This affidavit, together with annexures, runs to over 1,000 pages. It shows, in mind‑boggling detail, how the accounts of a particular trader are maintained and how a client's day to day position is ascertained. But really the filing of that affidavit was unnecessary.
As I have mentioned a number of times, Mr Casotti is a sophisticated investor. He would have been well aware of the way in which securities are traded on the Australian Stock Exchange. If he was not already aware then a cursory reading of the agreement he entered into with the defendant would have made the position clear. It must also have been clear that his indebtedness from time to time would be dependent upon the way in which ACH dealt with the defendant's trades. There was, effectively, no other way for the defendant to calculate what the plaintiff's indebtedness was from time to time. So to suggest the way in which the debt is described in the statutory demand is in some way misleading or does not allow the plaintiff to calculate precisely what its indebtedness might be is an argument without foundation.
In my view, there is no misdescription in the statutory demand which would justify the demand being set aside.
In all the circumstances then, I am satisfied this application ought be dismissed. Subject to hearing from the parties, the plaintiff ought pay the defendant's costs of this application including the reserved costs.
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